Warranty and Indemnity insurance (W&I) is an insurance solution that provides coverage for breaches of warranties and indemnification claims outlined in sale and purchase agreements. This insurance safeguards against losses or liabilities arising from undisclosed or unknown issues and indemnities. Essentially, the insurer assumes the responsibilities of the party providing the contractual warranties and tax indemnity. W&I insurance functions alongside negotiations and serves to enhance, rather than substitute, a thorough due diligence process.
Here's a snapshot of current trends and considerations in W&I insurance to help you make an informed decision about your transaction.
Deal Size and Viability: W&I insurance usually caters to transactions ranging from A$5 million to A$1 billion. However, most W&I insurers maintain a minimum premium that often exceeds what smaller deals can bear. Minimum premiums currently oscillate around A$200,000 - A$250,000. As a result, W&I insurance generally becomes cost-effective for deals exceeding A$10 million.
Pricing: Recently, the Australian market has experienced a significant uptick in M&A activity. This surge has seen increased demand for W&I insurance for deals, resulting in growing premiums over the last 18 months. W&I insurers hit capacity in Q4 of 2021, leading to high premiums and reduced insurance availability. However, pricing stabilised in 2022, thanks to easing pressure on insurer capacity, the growth of insurer deal teams, and the entrance of new market players.
Timing: Procuring W&I insurance can prove more challenging during peak deal periods, such as the financial year-end months of May/June and November/December, particularly for smaller transactions.
Industry Suitability: W&I insurance is more readily available and often preferred for deals in sectors such as real estate, infrastructure, logistics, technology, consumer goods, and retail. Although W&I insurers have traditionally been hesitant to cover heavily regulated sectors like financial services, telecommunications, and oil and gas, there has been greater openness in recent years.
The Role of Due Diligence: Comprehensive due diligence is crucial for securing optimal W&I insurance coverage. If initial due diligence falls short, insurers may request additional due diligence, exclude or limit coverage on certain matters, provide partial coverage, or increase premiums or excess/retention payable.
Areas of focus for W&I insurers currently include:
1. Employment Matters: Correct classification of employees, proper application of modern awards, industrial instruments, and employment-related tax. Insurers now expect a review of a sample (5%-10%) of employees to ensure compliance with awards and enterprise agreements.
2. COVID-19 Impact: Effects on valuations, management accounts, impacts on customer/supplier contracts, and paid multiples are increasingly under scrutiny from insurers.
3. Cyber Risks and Data Handling: Insurers are keeping a close eye on cyber threats and risk management controls businesses have in place.
Your due diligence will be a significant determinant of your deal's suitability for W&I insurance and the kind of coverage you receive. Before considering, please reach out at any time to discuss W&I insurance for your transaction.
Client Manager - Professional and Executive Risk
Honan Insurance Group Pty Ltd (Honan) (Australian Financial Services Licence no. 246749, ABN 67 005 372 396) is an insurance broker acting as agent for insureds and intending insureds. Honan is not an insurer. The information in these articles are current as at the date of first publication and have been prepared without taking into account your objectives, financial situation or needs. Any advice provided in these articles is of a general nature only. Any statements concerning tax, accounting or legal matters are based solely on Honan’s experience as an insurance broker and are not to be relied upon as accounting, tax or legal advice. Before making a decision to purchase an insurance policy, please read the relevant Product Disclosure Statement to make sure the policy is right for you. Insurance cover is subject to policy terms and conditions including policy limits and exclusions.